Ibm v. City and County of San Francisco

• Decision Date: 15 August 2005
• Docket Number: No. A107090.,A107090.
• Court: California Court of Appeals Court of Appeals
• Parties: IBM PERSONAL PENSION PLAN, Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO et al., Defendants and Respondents. City and County of San Francisco, Plaintiff and Appellant, v. Assessment Appeals Board of the City and County of San Francisco, Defendant; IBM Personal Pension Plan, Real Party in Interest and Respondent.

32 Cal.Rptr.3d 656

131 Cal.App.4th 1291

IBM PERSONAL PENSION PLAN, Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO et al., Defendants and Respondents.

City and County of San Francisco, Plaintiff and Appellant, v. Assessment Appeals Board of the City and County of San Francisco, Defendant;

IBM Personal Pension Plan, Real Party in Interest and Respondent.

No. A107090.

Court of Appeal, First District, Division 5.

August 15, 2005.

Fulbright & Jaworski, Robert W. Fischer, Jr., and Dinh Ha, Los Angeles, for Plaintiff and Appellant and for Real Party in Interest and Respondent.

Dennis J. Herrera, City Attorney and Wayne K. Snodgrass and Rafal Ofierski, Deputy City Attorneys for Defendants and Respondents and for Plaintiff and Appellant City and County of San Francisco.

SIMONS, J.

Revenue and Taxation Code¹ section 5140 provides that a real estate property tax refund action may be brought by the "person who paid the tax. . . . No other person may bring such an action; but if another should do so, judgment shall not be rendered for the plaintiff." In this matter, the IBM Personal Pension Plan (Plan) filed suit to recover property taxes and fraud penalties paid on its behalf by the Plan's trustee, The Chase Manhattan Bank, N.A. (Chase). Because we believe that the standing requirement in section 5140 means what it says, we conclude that the Plan, though the real party in interest, lacks standing to sue. Therefore we reverse that part of the judgment awarding the Plan in excess of $2.0 million and otherwise affirm.

FACTS²

The subject property, One Market Plaza, consists of a commercial office building parcel and a nearby parking garage parcel located in San Francisco. In 1973, the One Market Plaza Joint Venture (Joint Venture) was formed as a general partnership between The Equitable Life Assurance Society of the United States (Equitable), a New York corporation, and Southern Pacific Land Company (Southern Pacific), a California corporation. Subsequently, the Joint Venture built two large office towers on one parcel and a parking garage on a second parcel.

In 1985, the Plan, an employee benefit plan³ established by International Business Machines Corporation (IBM) for the benefit of IBM's former employees, asked its investment advisor, Equitable, to develop proposals for the Plan to invest in a portfolio of office buildings. At the time, the subject property was owned by the Joint Venture; Equitable held a 90 percent interest and the remainder was held by Southern Pacific. In December 1986, Equitable and the Plan⁴ entered into a complex transaction characterized as a group annuity contract by which the Plan acquired 90 percent of Equitable's 90 percent interest in the Joint Venture (thus 81 percent of the whole) that was placed into "Separate Account 143," established and maintained by Equitable exclusively on behalf of the Plan. In exchange, the Plan deposited $185 million, representing 81 percent of the subject property's fair market value, into Separate Account 143. Such "separate accounts" are highly regulated transactions authorized by the insurance laws of California and New York, through which insurance companies sell annuities backed by assets placed into separate accounts, segregated from the insurance company's general assets and, therefore, beyond the reach of the company's general creditors. It is undisputed that the insurance laws of California and New York treat assets placed in the separate account of an insurance company as legally remaining the property of the insurer (here, Equitable), not the beneficiary (here, the Plan). (See Ins.Code, § 10506, subd. (a); N.Y. Ins. Law, § 4240, subd. (a)(12).)

The transfer of ownership of California real estate triggers a reassessment of the property under article XIII A of the California Constitution (Proposition 13) and a recalculation of the property taxes due. As a result of the 1986 transaction and subsequent transactions, Equitable retained legal title to the subject property and remained a general partner in the Joint Venture, but the transactions in substance transferred beneficial ownership to the Plan. Following the 1986 transaction, the Plan bore the risks and benefits of ownership of 81 percent of the property. Income from rents on the Plan's share of the property were paid to the Plan through the separate account. In addition, pursuant to the 1986 transaction, the Plan had the power to hire the day-to-day manager for the property and demand that Equitable transfer its remaining interest in the property to the Plan. As a result of subsequent transactions, Equitable held a nominal 99.5 percent interest in the Joint Venture, with 90 percent of that interest allocated to Separate Account 143 on the Plan's behalf. None of these transactions was ever reported to the Assessor for the City and County of San Francisco (Assessor).

In March 1990, Equitable and the Plan entered into a second group annuity contract and created Separate Account 178, into which Equitable reallocated all of its interest in the Joint Venture from Separate Account 143.⁵ At this point, the subject property was still owned by the Joint Venture, which, itself, was 99.5 percent owned by Equitable on the Plan's behalf.

Also in March 1990, Equitable notified its property insurer to terminate coverage of the subject property effective March 30, because as of that date Equitable would no longer have an ownership interest in the subject property.

In June 1990, the remaining one-half percent interest in the Joint Venture was sold by Equitable Variable Life Insurance Company, Equitable's wholly owned subsidiary, to the Plan's wholly owned subsidiary, One Market Plaza Corp. In November 1990, the Plan, identifying itself as the owner of the subject property, replaced Equitable's management company as the manager of the subject property with the Plan's own manager, The Yarmouth Group. Thereafter, Equitable had no management responsibility for the subject property.

In June 1993, the Plan terminated the second annuity contract and Special Account 178 in order to transfer the subject property to a third party purchaser, and directed Equitable to transfer the proceeds from the sale to the Plan. In 1994, the subject property was sold to the unrelated third party. In November 1994, IBM, Chase, as trustee for the Plan, and Equitable executed a Release and Indemnification Agreement providing that upon completion of the sale of the subject property, the separate account and the Joint Venture were dissolved and the Plan was given all rights and liabilities arising from any reassessments and all rights to recover any overpayment of taxes and penalties. The Plan remained the sole remaining partner of the Joint Venture for purposes of the ensuing appeals before the AAB.

Following an investigation of the ownership of the subject property begun in or around January 1992, the Assessor concluded that the 1986 transaction constituted a change of ownership under the Revenue and Taxation Code.⁶ In particular, the Assessor determined that the 1986 transaction represented a transfer of 81 percent of the beneficial ownership in the subject property from Equitable to the Plan in exchange for the Plan's payment to Equitable of 81 percent of the subject property's fair market value. The Assessor concluded that, as a result of the 1986 transaction, Equitable transferred to the Plan all rights of ownership, including the right to manage, receive rent from and sell the subject property.⁷ Thereafter, the Assessor gave Equitable, as the owner of record of the subject property, notice that the property had been reassessed through a series of supplemental and escape assessments for the 1986 through 1994 tax roll years.

In November 1994, the Assessor notified Equitable that a 25 percent fraud penalty was being imposed pursuant to section 504 for the years 1987 through 1992 based on the failure to report the 1986 transaction as a change of ownership.⁸ In 1995, following authorization by IBM, Chase wired approximately $18.4 million to the City and County of San Francisco (City) as payment of these fraud penalties.⁹

In 1995, Chase, as trustee for the Plan, filed an action in federal district court seeking a declaratory judgment that the Assessor's determination that the creation of the separate account constituted a change of ownership under California law was preempted by ERISA. (See Chase Manhattan Bank, N.A. v. City and County of San Francisco (9th Cir.1997) 121 F.3d 557, 558.) After the district court dismissed the case, the Ninth Circuit upheld the district court's determination that the ERISA issue could be raised in state court. (Id. at p. 560.)

AAB Proceedings

The AAB received applications from Equitable and the Joint Venture for a reduction in and a refund of the penalty and nonpenalty assessments imposed for the tax years 1986-1987 through 1993-1994. The applications challenged three determinations by the Assessor: (1) the conclusion that a change of ownership of the subject property occurred in 1986; (2) the valuation of the subject property for the years 1986-1994 triggered by the change in ownership; and (3) the imposition of a fraud penalty for the tax years 1986-1992. In August 2001, following a hearing, the AAB issued its written "FINDINGS OF FACT, CONCLUSIONS OF LAW, AND DECISION," which upheld the Assessor. Thereafter, the City and the Assessor notified the AAB that the "taxpayer" was due a partial refund as a result of the AAB's decision that the property should in part be valued at a lower rate than the Assessor originally used to calculate the escape and supplemental assessments.¹⁰ On March 8, 2002, in response to requests by the parties, the AAB issued a clarification of its prior order stating that the Assessor could properly apply the fraud penalty only to the office complex parcel and could not apply the penalty to the off-site parking garage parcel. As a result, the subject...